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Can Small Capital Become Your Core Trading Problem?

8:43 PG 09/09/2020
8704
For beginners

Many novice traders tend to blame everyone but themselves for their failures. They cite low starting capital as one of the reasons for their losing trades. However, your failures don’t depend on your balance size but on competent risk management.

What’s Wrong with Low Capital

An inexperienced trader often refuses to believe that his decision could be wrong. When the market starts to move against him he doesn’t hurry to close his position. The trader is waiting for the price to reverse and start making a profit.

It is quite obvious that there is not enough money on the account to withstand the drawdown. Trades get closed by Stop Out. And often this happens just before the long-awaited market reversal. At this point, the inexperienced trader begins to blame low capital for his failure. It seems to him that if there were a little more money on his balance, then the account would be able to go through the drawdown and the trade would become profitable.

A trader with a similar mistaken view returns several more times to Forex with larger capital. He has to borrow large sums on the side. However, the outcome remains the same - a complete loss of capital.

Let's Be Realistic

No matter how much money this hypothetical trader invests, he will lose it as quickly as a small capital. His problem is not in the size of his balance but in a number of other mistakes:

  1. Lack of a well thought out risk management system
  2. No clear plan for exiting a losing trade
  3. Refusal to strictly adhere to the set systems due to lack of self-discipline, etc.

If you are prone to one or more of these mistakes, you will continue to lose money regardless of the size of your investment.

How to Stop Losing Money

Losing trades are inevitable as market behavior is unpredictable. However, with the right approach to trading, the profits from successful trades will offset the losses from unsuccessful ones. Your overall result will be positive.

If you want to make a profit even with a low initial investment, follow the basic rules of good money management:

  • Start with your mindset. If you convince yourself that with a low starting capital, you can’t make a profit, you won’t make it. In Forex, it is possible to increase the balance even with an $100 investment.
  • Work on self-discipline. A good trading strategy and risk management plan can’t help you if you don’t strictly follow them.
  • Set the maximum risk level to 1-2% of your capital for each trade.
  • The risk-to-reward ratio should be 1:3 at first. This way, the profits from successful trades will easily cover your inevitable losses.
  • Timely close your trades. Don't wait for the market to reverse. If the price goes against you, close the position and search for new trading opportunities.

As you can see, the problems of an inexperienced trader don’t lie in low capital. If you develop a clear system from the beginning and stick to it, you will be successful. Try your plan first with a small capital and then invest a larger amount for a higher return. Good luck!

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